Serving as a trustee for Trust-Owned Life Insurance (TOLI) is a significant responsibility involving adhering to various legal and fiduciary duties. The trustee must act in the best interest of the beneficiaries, guided by the terms of the trust document and relevant regulations. In this post, we explore the key responsibilities of a TOLI trustee, referencing key regulations like the Uniform Prudent Investor Act (UPIA) and practical guidance from regulatory bodies such as the OCC’s Unique and Hard-to-Value Assets Handbook.
Fiduciary Duties of a TOLI Trustee
A trustee is a fiduciary who must prioritize the interests of the beneficiaries of the trust above all else.
Key responsibilities of a TOLI trustee include:
- Prudent Investment: Invest trust assets wisely, considering the trust’s purposes, terms, distribution requirements, and other circumstances.
- Adherence to Trust Terms: Follow the specific directives outlined in the trust agreement.
- Impartiality: Act impartially and administer assets to benefit all beneficiaries fairly.
- Avoidance of Self-Interest: Refrain from using trust property for personal gain.
- Conflict of Interest Avoidance: Avoid any actions that could create a conflict of interest.
Read More: The 5 Biggest Mistakes TOLI Trustees Make & How to Fix Them
The Uniform Prudent Investor Act (UPIA)
Endorsed by the American Bar Association, American Bankers Association, and approved in 44 states as well as the District of Columbia, the UPIA revamps and updates rules that govern the actions of trustees. The trust document can override the UPIA, but if not overridden, the UPIA must be followed. While every aspect of this Act may not be
applicable to TOLI, there is enough guidance to make the document the framework for prudent TOLI trust management.
- Prudent Investor Rule (Section 1): Underscores the trustee’s “duty to the beneficiaries of the trust to comply with the prudent investor rule set forth” in the UPIA
- Standard of Care, Portfolio Strategy, Risk and Return Objectives (Section 2): Trustees must “invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.”
- Initial Review (Section 4): Trustees must “review the trust assets and make and implement decisions concerning the retention and disposition of assets, to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust” upon acceptance.
- Loyalty to Beneficiaries (Section 5): A trustee must “invest and manage the trust assets solely in the interest of the beneficiaries.”
- Investment Costs (Section 7): Requires that a trustee “only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee.”
- Compliance (Section 8): Highlights prudent decision making as it deals with Compliance which is “determined considering the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight.”
- Delegation of Investment and Management Function (Section 9): Allows trustees to
“delegate investment and management functions” if they do not have the necessary skills to manage this asset.
Guidance from the OCC’s Unique and Hard-to-Value Assets Handbook
Published by the Office of the Comptroller of the Currency (OCC) in 2012, this handbook offers critical insights for TOLI trustees managing unique and hard-to-value assets, including life insurance policies. Key points include:
- Initial Post-Acceptance Review: Conduct a prompt review of all assets within 60 days of substantial funding.
- Annual Review: Evaluate all assets annually to ensure they remain appropriate for the trust.
- Prudent Processes: Develop and document processes for reviewing new and replacement life insurance policies.
- Use of Outside Vendors: Employ qualified, independent advisors if internal expertise is lacking, ensuring objectivity and comprehensive policy management.
Case Study: The Cochran Case – KeyBank
The case of Stuart Cochran Irrevocable Trust v. KeyBank, NA, provides valuable lessons for trustees of trust-owned life insurance policies. KeyBank, acting as successor trustee, replaced existing variable life policies with a guaranteed universal life policy, reducing market risk but also the death benefit. When the insured died unexpectedly, the beneficiaries sued, claiming breach of fiduciary duties. The court sided with KeyBank, emphasizing the trustee’s adherence to prudent investor standards and the importance of thorough documentation and process.
Key Takeaways for TOLI Trustees
- Avoid Conflicts of Interest: Ensure the trustee’s actions are free from personal gain and focused on beneficiary interests.
- Document Prudent Processes: Maintain detailed records of decision-making processes, especially for policy replacements.
- Communicate with Beneficiaries: While not always legally required, proactive communication can prevent disputes and litigation.
- Leverage Expertise: Utilize external advisors for specialized knowledge, particularly when internal resources are insufficient.
- Evaluate and Monitor: Regularly review the financial health of insurance carriers and the performance of policies, considering potential replacements only after thorough analysis.
By adhering to these principles and leveraging established guidelines, TOLI Trustees can effectively manage their responsibilities, ensuring the trust assets are administered in the best interest of the beneficiaries while minimizing legal risks and liabilities.
Dive deeper into fiduciary duties and ensure that your team is following industry best practices with our on-demand webinar “The 5 Biggest Mistakes TOLI Trustees Make and How to Fix Them.” This on-demand webinar provides valuable insights and practical tips to help you avoid common pitfalls and enhance your trust management skills.
